Monday, February 28, 2011

Evil Employers (Scenario)

Your employer gives you a job and you work 2000 hours per year (40 hours a week for 50 weeks).

Your employer employs 49 other people and they each work 2000 hours a year.

Assuming a fairly generous rate of $20/hour, you would be making $40,000 a year as would the other 49 people at your job. From a labor cost alone your employer would need to make $2 million to pay all of you, but he believes that his employees are worth it.

If the company pays rent on the building in which you work, we'll make a modest guess of $19,000 each month, for a total of $228,000 annually. (Assuming 400 square feet per person with a company of 50 people at $0.95/square foot)

The costs associated with doing business are typically coming out of the pockets of the owner of the business. We'll call this the "investment". In this office you are provided with a phone, a computer, a desk and a chair totaling about $700. Everyone in the office has one, so the cost would be $35,000. (These are dirt cheap rates I am throwing out. The real cost would be a lot more.)

So the owner would be paying about $2,228,000 a year to offer all 50 of these jobs at $20/hr. Before you are able to work, he has to pay about $35,000 to furnish the office, likely out of his own pocket.

He negotiates this workplace and gets everything up and running. In its first year, the company takes in $4 million in revenue. Things are good. He gives everyone a 3% raise to follow the average inflation and as a thank you for making him some money. (He is now paying $2,060,000 in labor costs bringing his annual cost to $2,288,000)

Unfortunately, the economy takes a slight downturn, and the company only takes in $3 million in revenue. His costs don't change, but his profits suffer. He makes the tough decision to cut 5 jobs so he can save $200,000 a year. Looking over his staff he cuts the 5 worst performing employees and gives the rest a 3% raise. (His labor cost is now $1,915,800 and his rent is $228,000 for a total of $2,143,800)

The workers that did not get laid off get kind of antsy because five of their coworkers got laid off. They decide to organize to ensure that the rest of the workers will be compensated in the event of layoffs. They demand a raise to $24/hour and that he pay any more workers that get laid off for six months at 70% of their pay ($22 of their hourly goes to them and the other $2 goes to union dues). He declines the agreement. The workers strike until he agrees to their demands. ($2,160,000 labor costs)

Unfortunately the economy takes another turn for the worse, the company takes in $2 million in revenues and the owner is forced to lay off 10 employees to make up for having to pay them 70% of their wages. The remaining ones strike until they get to keep 5 of the workers. The owner takes a loss in his annual pay.

He made the investment into the company and reaped some of the benefits, but the workers have swallowed his profits. None of the employees have even considered a pay cut, yet he is losing money paying their inflated wages. He once believed in his workers, but he can't anymore. They shared his vision when the revenue was coming in, but once the revenue lessened, they only saw how it affected them.

Why should he continue a losing venture? Should he continue to operate at a loss just to engender good will with his employees or should he shut the office down? His employees won't take any cuts for him, but they are demanding that he take cuts for them.

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